U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2015

 

QUEST SOLUTION, INC

(Exact name of small business issuer as specified in its charter)

 

Delaware		20-3454263
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

2580 Anthem Village Drive

Henderson, NV 89052

(Address of principal executive offices) (Zip Code)

 

(702) 399-9777

(Issuer’s telephone number)

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO[  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [  ] NO [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	[  ]
Accelerated filer	[  ]
Non-accelerated filer (Do not check if a smaller reporting company)	[  ]
Smaller reporting company	[X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES [  ] NO [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 35,129,495 shares of common stock, $0.001 par value, as of May 1, 2015.

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS		F-1
CONDENSED CONSOLIDATED BALANCE SHEETS		F-1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		F-2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		F-3
NOTES TO FINANCIAL STATEMENTS		F-4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET		5
ITEM 4. CONTROLS AND PROCEDURES		6
PART II - OTHER INFORMATION		6
ITEM 1. LEGAL PROCEEDINGS		6
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.		6
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.		6
ITEM 4. MINE SAFETY DISCLOSURES.		6
ITEM 5. OTHER INFORMATION.		6
ITEM 6. EXHIBITS		6
SIGNATURES		7

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

QUEST SOLUTION, INC.

(F.KA. AMERIGO ENERGY, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		As of
		March 31, 2015				December 31, 2014
ASSETS
Current assets
Cash		$	277,432			$	233,741
Accounts receivable, net of allowances of $52,9244 and $62,800, respectively			8,511,074				9,099,229
Inventory			502,964				606,231
Prepaid expenses			296,753				191,498
Other current assets			389,657				377,060
Total current assets			9,977,880				10,507,759
Fixed assets, net of accumulated depreciation of $3,062,903 and $1,781,086, respectively			189,600				206,662
Deferred tax asset			1,299,417				1,299,417
Goodwill			14,101,306				14,101,306
Trade name			2,700,000				2,700,000
Intangibles, net			464,058				466,870
Customer Relationships			4,390,000				4,390,000
Other assets			309,946				317,304
Total assets		$	33,432,207			$	33,989,318
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued liabilities		$	6,032,839			$	7,406,146
Accounts payable and accrued liabilities, related party			-				51,806
Line of credit			2,513,940				1,819,345
Advances, related party			47,776				50,000
Accrued payroll and sales tax			1,581,655				917,079
Deferred revenue, net			827,228				-
Current portion of note payable			300,000				310,000
Notes payable, related parties, current portion			3,601,650				4,201,650
Other current liabilities			189,000				845,327
Total current liabilities			15,094,088				15,601,353
Long term liabilities
Note payable, related party, net of debt discount			17,372,975				17,007,175
Deferred tax liability			29,783				29,783
Other long term liabilities			144,173				157,495
Total liabilities			32,641,019				32,795,806
Stockholders' equity (deficit)
Preferred stock; $0.001 par value; 25,000,000 shares authorized 500,000 and 3,500,000 shares outstanding as of March 31, 2015 and December 31, 2014, respectively.			500				500
Common stock; $0.001 par value; 100,000,000 shares authorized; 35,029,495 and 35,029,495 shares outstanding of March 31, 2015 and December 31, 2014, respectively.			35,029				35,029
Additional paid-in capital			17,919,897				17,900,139
Accumulated (deficit)			(17,164,238	)			(16,742,156	)
Total stockholders' equity (deficit)			791,188				1,193,512
Total liabilities and stockholders' equity		$	33,432,207			$	33,989,318

 

The accompanying notes to the financials should be read in conjunction with these financial statements.

 

 

QUEST SOLUTION, INC.

(F.KA. AMERIGO ENERGY, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the three months
		ending March 31,
		2015				2014
Revenues
Gross Sales		$	10,712,016			$	9,650,265
Less sales returns, discounts, & allowances			(36,046	)			(28,105	)
Total Revenues			10,675,970				9,622,160
Cost of goods sold
Cost of goods sold			8,281,365				7,287,323
Cost of goods sold, related party			-				347,261
Total costs of goods sold			8,281,365				7,634,584
Gross profit			2,394,605				1,987,576
Operating expenses
General and administrative			1,012,444				245,155
Salary and employee benefits			1,324,432				1,381,716
Depreciation and amortization			25,496				7,894
Stock compensation			38,624				24,499
Professional fees			88,480				129,775
Total operating expenses			2,489,476				1,789,039
Income (loss) from operations			(94,871	)			198,537
Other income (expenses):
Gain on debt settlement			-				151,949
Loss on license settlement			-				(93,578	)
Loss on note receivable settlement			-				(18,995	)
Taxes			113				-
Interest expense			(395,272	)			(600	)
Other expenses			(392	)			-
Other income			68,340				9,106
Total other income (expenses)			(327,211	)			47,882
Net Income Before Income Taxes			(422,082	)			246,419
(Provision) Benefit for Income Taxes
Deferred			-				-
Current			-				-
Net income (loss)		$	(422,082	)		$	246,419
Net income (loss) per share - basic		$	(0.01	)		$	0.01
Net income (loss) per share - diluted		$	(0.01	)		$	0.01
Weighted average number of common shares outstanding - basic			35,029,495				33,362,776
Weighted average number of common shares outstanding - diluted			39,971,337				34,630,416

 

The accompanying notes to the financials should be read in conjunction with these financial statements.

 

 

QUEST SOLUTION, INC.

(F.KA. AMERIGO ENERGY, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)

 

		For the three months
		ending March 31,
			2015				2014
Cash flows from operating activities:
Net loss		$	(422,082	)		$	246,419
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock based compensation - shares for services			(38,075	)			3,417
Warrants granted			19,758				10,247
Gain on license			-				93,578
Loss on cancelled shares			-				(105,901	)
Debt discount accretion			200,000				-
Depreciation and amortization			3,519				1,519
Loss on receivable settlement			-				(37,491	)
Loss on note receivable settlement			-				18,995
Interest expense			(344,036	)			-
Bad debt expense			-				1,559
Changes in operating assets and liabilities:
(Increase) / decrease in accounts receivable			588,155				(896,858	)
(Increase) / decrease in prepaid			(77,465	)			79,949
(Increase) / decrease in prepaid, related party			-				347,262
(Increase) / decrease in inventory			103,267				-
(Increase) / decrease in customer deposit			4,775				1,463
Increase / (decrease) in accounts payable and accrued liabilities			(721,397	)			(632,738	)
(increase) in deferred expenses			-
increase in deferred revenues, net			827,228
Increase / (decrease) in accounts payable and accrued liabilities, related party			-				(23,703	)
(Increase) / decrease in salary payable, related party			-				45,000
(decrease) in other assets			3,458
(Increase) / decrease in other liabilities			(15,545	)			189,635
Increase / (decrease) in advances from related party			-				112
Net cash provided by (used in) operating activities			(131,560	)			(657,536	)
Cash flows from investing activities:
(Purchase of) cash from acquisitions			-				1,950,120
Change in other assets			-				12,499
(Purchase of) Sale of property and equipment			13,543				-
Net cash provided by (used in) investing activities			13,543				1,962,619
Cash flows from financing activities:
Proceeds from loan receivable			-				78,000
Proceeds from note receivable			-				4,500
Proceeds (payment) on line of credit			694,595				(60,000	)
Proceeds (payment) from notes/loans payable			(786,007	)			(775,000	)
Payment on loans payable			(10,000	)			-
Net cash provided by (used in) financing activities			(101,412	)			(752,500	)
Net (decrease) increase in cash			43,691				552,583
Cash, beginning of period			233,741				13,302
Cash, end of period		$	277,432			$	565,885
Cash paid for interest		$	34,708			$	-
Cash paid for taxes		$	79,484			$	-
Supplementary cash flow information:
Stock issued for services			-			$	41,900
Warrants issued			72,000			$	368,878

 

The accompanying notes to the financials should be read in conjunction with these financial statements.

 

 

QUEST SOLUTION, INC

(FKA AMERIGO ENERGY, INC.)

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND Summary of Significant Accounting Policies

 

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

The interim consolidated financial statements of Quest Solution, Inc. include the combined accounts of Quest Marketing, Inc., an Oregon Corporation and Bar Code Specialties, Inc., (“BCS”) a California Corporation. BCS was acquired on November 21, 2014, and as such the operating results of BCS have been consolidated into the Company’s consolidated results of operations beginning on November 22, 2014. The company’s currently operate as a single business unit. All material intercompany transactions and accounts have been eliminated in consolidation.

 

The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2014 and notes thereto included in the Company’s Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.

 

Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.

 

Summary of Significant Accounting Policies

 

This summary of significant accounting policies of Quest Solution, Inc. is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

 

Cash

 

Cash consists of petty cash, checking, savings, and money market accounts. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of March 31, 2015 and December 31, 2014.

 

The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.

 

  

USE OF ESTIMATES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates and assumptions used in preparation of the consolidated financial statements.

 

PURCHASE ACCOUNTING AND BUSINESS COMBINATIONS

 

The Company accounts for its business combinations using the purchase method of accounting which requires that intangible assets be recognized apart from goodwill if they are contractual in nature or separately identifiable. Acquisitions are measured on the fair value of consideration exchanged and, if the consideration given is not cash, measurement is based on the fair value of the consideration given or the fair value of the assets acquired, whichever is more reliably measurable. The excess of cost of an acquired entity over the fair value of identifiable acquired assets and liabilities assumed is allocated to goodwill.

 

The valuation and allocation process relies on significant assumptions made by management. In certain situations, the allocations of excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives updated information, including appraisals and other analyses, which are completed within one year of the acquisition. Revisions to the fair values, which may be significant, are recorded when pending information is finalized, within one year from the acquisition date.

 

ACCOUNTS RECEIVABLE

 

Accounts receivable are carried at their estimated collectible amounts. The Company provides allowances for uncollectible accounts receivable equal to the estimated collection losses that will be incurred in collection of all receivables. Accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company’s management determines which accounts are past due and if deemed uncollectible, the Company charges off the receivable in the period the determination is made. The Company generally requires no collateral to secure its ordinary accounts receivable. At March 31, 2015 and December 31, 2014, accounts receivable 90 days past due totaled $292,021 and $118,913, respectively. Based on management’s evaluation, accounts receivable has a balance in the allowance for doubtful accounts of $ 59,123 and $66,215 for the period ending March 31, 2015 and December 31, 2014, respectively.

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at purchased cost and depreciated using both straight-line and accelerated methods over estimated useful lives ranging from 3 to 10 years. Upon disposition of property and equipment, related gains and losses are recorded in the results of operations. Depreciation expense for period ending March 31, 2015 and December 31, 2014 was $19,351 and $16,222, respectively. For federal income tax purposes, depreciation is computed using the modified accelerated cost recovery system. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred.

 

INTANGIBLE ASSETS

 

Intangible assets are stated at cost, net of accumulated amortization. The assets are being amortized on the straight-line method over useful lives ranging from 3 to 10 years. Amortization expense for the period ending March 31, 2015 and December 31, 2014 was $2,812 and $9,376, respectively.

 

		March 31, 2015				December 31, 2014
Software		$	1,276,524			$	1,276,524
Licenses			450,000				450,000
Accumulated amortization			(1,262,465	)			(1,259,653	)
Intangibles, net		$	464,059			$	466,871

 

  

Total expected amortization expense for the next 2 years are as follows:

 

Years ending December 31,
2015				8,968
2016				7,902
Total			$	16,870

 

The company has made a significant investment in software over the years. This amount is treated as intangible assets which are being amortized over the expected useful life. Intangible assets are evaluated annually for potential impairment.

 

Purchased intangible assets with finite useful lives are amortized over their respective estimated useful lives (using an accelerated method for customer relationships and trade names) to their estimated residual values, if any. The Company’s finite-lived intangible assets consist of customer relationships, contractor and resume databases, trade names, and internal use software and are being amortized over periods ranging from two to nine years. Purchased intangible assets are reviewed annually to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, recoverability is assessed by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the rate of amortization is accelerated and the remaining carrying value is amortized over the new shorter useful life. No impairments were identified or changes to estimated useful lives have been recorded.

 

DEFERRED FINANCING COSTS

 

Deferred Financing Costs incurred by the Company in connection with the issuance of debt and the bank line of credit are deferred and amortized to interest expense over the life of the underlying indebtedness using the straight line method.

 

SHIPPING AND HANDLING COSTS

 

The Company classifies shipping and handling costs for purchases of raw materials and freight out net of freight charged to customers as cost of goods sold. Total delivery costs for the period ending March 31, 2015 and March 31, 2014 were $64,262 and $39,126, respectively.

 

ADVERTISING

 

The Company generally expenses advertising costs as incurred. During the period ending March 31, 2015 and March 31, 2014, the Company spent $77,410 (marketing, trade show and store front expense) and 61,343 on advertising, net of co-operative rebates, respectively.

 

The Company received rebates on advertising from co-operative advertising agreements with several vendors and suppliers. These rebates have been recorded as a reduction to the related advertising and marketing expense in the period earned.

 

INVENTORY

 

Substantially all inventory consists of raw materials and finished goods and are valued based upon first-in first-out (“FIFO”) cost, not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed evaluation of inventory relative to any potential slow moving products or discontinued items as well as the market conditions for the specific inventory items.

 

DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future acquisitions.

 

  

Fair Value of Financial Instruments

 

The Company’s financial instruments include cash, accounts receivable, accounts payable, and notes payable. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at March 31, 2015 and December 31, 2014. The Company did not engage in any transaction involving derivative instruments.

 

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The three levels of the fair value hierarchy are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

REVENUE RECOGNITION

 

Recurring technology and services revenue consists of subscription-based fees, software subscription license fees, software maintenance fees and hosting fees related to the use of our solution to manage our customers’ communications expenses, as well as fees for perpetual software licenses and professional services and products sold.

 

We recognize revenue when persuasive evidence of an arrangement exists, pricing is fixed and determinable, collection is reasonably assured and delivery or performance of service has occurred. Recurring technology and services subscription-based fees, software subscription license fees, software maintenance fees and hosting fees are recognized ratably over the term of the period of service. The subscription-based services we provide include help desk, staging, carrier activations and provisioning.

 

Sales revenue is recognized upon the shipment of merchandise to customers. The Company recognizes revenues from software sales when software products are shipped.

 

Software license fees consist of fees paid for a perpetual license agreement for our technology, which are recognized in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 605, Software Revenue Recognition, as amended.

 

Professional services related to the implementation of our software products, which we refer to as consulting services, are generally performed on a fixed fee basis under separate service arrangements. Consulting services revenue is recognized as the services are performed by measuring progress towards completion based upon either costs or the achievement of certain milestones.

 

NET INCOME (LOSS) PER COMMON SHARE

 

Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic net loss per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted-average number of common shares outstanding for computing basic EPS as of March 31, 2015 and December 31, 2014 were 35,029,495 and 33,362,776, respectively.

 

  

The fully diluted number of 39,971,337, includes the potential of the existing senior subordinated debt holders converting their debt into common shareholder equity at $1.00 per share (for $2,656,382 in debt) and $2.00 per share (for $1,962,382 in debt). Despite the fact the conversion is “out of the money”, accounting rules require these amounts to be included in diluted shares outstanding. Additional terms of the debt would require the Board of Directors to consent to any debt holder converting and having a position greater than 4.99% outstanding on the date of conversion.

 

GOODWILL

 

Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested annually at December 31 for impairment. The annual qualitative or quantitative assessments involve determining an estimate of the fair value of reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill exists. A qualitative assessment evaluates whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step quantitative goodwill impairment test. The first step of a quantitative goodwill impairment test compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss may be recognized. The amount of impairment loss is determined by comparing the implied fair value of reporting unit goodwill with the carrying amount. If the carrying amount exceeds the implied fair value then an impairment loss is recognized equal to that excess. No impairment charges have been recorded as a result of the Company’s annual impairment assessments.

 

We test our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is December 31, at which date we test our reporting units, which is currently our ownership in Quest Solution, Inc.

 

INCOME TAXES

 

The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

 

Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for consolidated financial reporting purposes and such amounts recognized for tax purposes, and are measured by applying enacted tax rates in effect in years in which the differences are expected to reverse.

 

The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

The Company has evaluated the deferred income taxes with regards to Section 382 of the Internal Revenue Code and has determined no limitations on the use of net operating loss carryforwards exist at March 31, 2015.

 

STOCK-BASED COMPENSATION

 

The Company recognizes stock-based compensation in accordance with ASC Topic 718 “Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.

 

For non-employee stock-based compensation, we have adopted ASC Topic 505 “Equity-Based Payments to Non-Employees”, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC Topic 718.

 

  

RECENT ACCOUNTING PRONOUNCEMENTS

 

The company has evaluated the recent pronouncements and believes that none of them will have a material effect on the company’s financial statements.

 

NOTE 2 – CONCENTRATIONS

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, accounts receivable, and accounts payable. Beginning January 1, 2015, all of our cash balances were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per depositor at each financial institution. This coverage is available at all FDIC member institutions. The Company uses Wells Fargo Bank, which is an FDIC insured institution. Based on these facts, collectability of bank balances appears to be adequate.

 

For the quarter and year ending March 31, 2015 and March 31, 2014, one customer accounted for 5% and another customer in 2013 accounted for 13% of the Company’s revenues, respectively.

 

Accounts receivable at March 31, 2015 and December 31, 2014 are made up of trade receivables due from customers in the ordinary course of business. One customer made up 8% and another customer 34% of the trade accounts receivable balances at March 31, 2015 and December 31, 2014, respectively.

 

Accounts payable are made up of payables due to vendors in the ordinary course of business at March 31, 2015 and December 31, 2014. One vendor made up 50% and 82%, respectively of the outstanding balance, which represented greater than 10% of accounts payable at March 31, 2015 and December 31, 2014, respectively.

 

NOTE 3 – ACQUISITION OF QUEST MARKETING, INC AND BAR CODE SPECIALTIES, INC.

 

On January 10, 2014, the Company completed the purchase of Quest Marketing, Inc. (“Quest”), an Oregon corporation in the technology, software, and mobile data collection systems business.

 

The Company completed an ASC 805 Purchase Price Allocation for the acquisition by an outside independent valuation analysis.

 

The purchase price consideration paid was determined to be $18,278,372.

 

The consideration given to the shareholders of Quest Marketing, Inc. were as follows:

 

$6,375,000 in promissory notes, convertible at $1.00 per share and $9,625,000 in promissory notes for which payments were originally to be a minimum of 45.0% of the cash earned from EBITDA of Quest Solution, Inc. during the prior quarter.

 

These promissory notes are recorded net of a debt discount of $4,000,000, which is being accreted to interest expense at $800,000 per year or $200,000 per quarter.

 

In November 2014, the promissory notes were amended to be senior subordinated promissory notes with quarterly payments due pro-rata to the promissory notes issued and outstanding in conjunction with the acquisition of Bar Code Specialties (discussed below) at a maximum of 35% of EBITDA. The promissory notes bear interest at 1.89% per year.

 

The prior owners of Quest shall retain a security interest in the subsidiary until the promissory note is satisfied.

 

In accordance with ASC 805-10-25-13, the following table summarizes the fair values of the assets acquired as determined by our independent valuation analysis and liabilities assumed at the date of acquisition and the preliminary allocation of the purchase price to the fair value of net assets acquired:

 

Net Fixed Assets		$	68,000
Current Assets (excluding inventory)			7,456,000
Total Inventory (at Net Realizable Value)			60,000
Other Non-Current Assets			3,000
Trade Name			2,700,000
Customer Relationships			4,390,000
Goodwill			3,601,372
Total purchase price allocated		$	18,278,372

 

  

On November 21, 2014, the Company completed the purchase of Bar Code Specialties, Inc. (“BCS”), a California company in the same industry of technology, software, and mobile data collection systems business. BCS also has a small label printing business to complement its data collection systems business.

 

The purchase price for the shares of BCS was $11,000,000, with a total purchase price consideration of $10,396,316, after a working capital adjustment based on the net working capital at the date of the acquisition. This was completed during February 2015, which will reduce the promissory note $603,684.

 

The consideration given to the shareholders of BCS were as follows:

 

$11,000,000 in promissory notes, convertible at $2.00 per share with payments due pro-rata to the promissory notes issued and outstanding in conjunction with the acquisition of Quest Marketing at a maximum of 35% of EBITDA. The promissory note bears interest at 1.89% per year.

 

The prior owners of BCS shall retain a security interest in the subsidiary until the promissory note is satisfied.

 

In accordance with ASC 805-10-25-13, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition and the preliminary allocation of the purchase price to the fair value of net assets acquired:

 

Cash		$	75,683
Accounts receivable, net			2,864,661
Other current assets			1,537,912
Other assets			548,311
Fixed assets, net			131,538
Goodwill			10,499,934
Accounts payable and accrued liabilities			(5,261,723	)
Total purchase price allocated		$	10,396,316

 

NOTE 4 – INVENTORY

 

At March 31, 2015 and December 31, 2014, inventories consisted of the following:

 

		March 31, 2015				December 31, 2014
Equipment held for resale		$	74,393			$	45,011
Raw Materials			63,106				44,216
Work in Progress			0				18,623
Finished goods			365,465				487,317
Clearing service			(500)				11,064
Total inventories		$	502,964			$	606,231

 

NOTE 5 – COST OF GOODS SOLD, RELATED PARTY

 

At the acquisition of Quest marketing, there $1,273,292 of related party prepaid expenses for insurance policies Quest Marketing previously maintains insurance policies with an insurance company for which the stockholders also own. The Company deemed this to be a related party and the insurance expenses paid during 2013 which was for 2014 coverage, while not a cash expense for 2014, was taken as an expense from January 2014 through November 2014. The amount of expense was $1,273,292 in prepaid expenses for insurance coverage, paid in 2013, for 2014 coverage. As of January 1, 2014, the Company will not be renewing any of these policies now that they have expired. 

 

For the 3 months ended March 31, 2014, the Company recorded $347,261 of expense related to this, as opposed to $0 recorded during the 3 months ended March 31, 2015.

 

NOTE 6 – PREPAIDS

 

The Company currently has $296,753 and $191,498 of expenses that were prepaid as of March 31, 2015 and December 31, 2014, respectively which we expect to expense during 2015.

 

 

NOTE 7 – INTELLECTUAL PROPERTY

 

On January 10, 2014, the Company came to terms on a settlement with its prior investment in a license and the related liquor brands. The Company concurrently canceled its consulting contract related to the liquor line and received back 1,765,000 of the shares that had previously been issued in conjunction with this venture. This cancellation also removed the $2,000,000 promissory note related to the acquisition, as well as the $65,000 annual consulting contract with the Consultant and the corresponding 2,000,000 warrants issued as well. As of December 31, 2014, there are no amounts remaining due to this transaction. 

 

During the period ending December 31, 2014, the company acquired four different licenses for technology. The licenses acquired are for (1) re-enforcing steel detection, (2) gun barrel detection, (3) air frame inspection, and (4) mining belt guard inspection. The cost of the first three licenses was $150,000 each with a 5% royalty on sales. The term of these licenses is 15 years each. A fourth license was acquired with minimum purchase requirements stated in the contract. There were no sales or licensing activities and no royalties earned or payable as of March 31, 2015.

 

NOTE 8 – OPERATING LEASE COMMITMENTS

 

In April 2012, Quest Marketing, Inc. signed an operating lease at 860 Conger Street, Eugene, OR 97402. The premises, consisting of approximately 7,000 square feet of warehouse/office space shall serve as the Company’s headquarters. The lease provides for monthly payments of $3,837 through March 2013, and adjusted annually to reflect changes in the cost of living for the remainder of the lease term. In no event shall the monthly rent be increased by more than 2 percent in any one year. The lease is due to expire March 2017.

 

The lease at the Company’s Ohio location, signed by Quest Marketing, Inc. in July 2011, provides for monthly payments of $2,587 through June 2012; and $2,691 thereafter. The lease is due to expire June 30, 2018.

 

The Company leases space at its corporate office in Henderson, Nevada at the rate of $850 per month. The lease is an annual lease renewable in December 2015.

 

The Company has a commercial real estate operating lease with the former owner and founder of BCS for the company’s BCS office and warehouse location in Garden Grove, CA. The following is a schedule of future minimum facility lease payments required under the related party operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2014.

 

Total rent expense at the Garden Grove, CA location was $9,000 per month or $27,000 for the three months ending March 31, 2015.

 

SUMMARY OF OPERATING LEASE COMMITMENTS

 

The future minimum operating lease payments are as follows:

 

As of March 31,
2015
2015			$	116,318
2016				187,257
2017				152,033
2018				140,292
2019				108,000
2020				108,000
Thereafter				117,000
Total			$	928,900

 

NOTE 9 – OTHER LIABILITIES

 

In connection with the BCS acquisition the company assumed a related party note payable to the former CTO of the RFID division of BCS. The note is payable in equal monthly installments of $4,758 beginning October 31, 2014 and ending October 2018. The loan bears interest at 1.89% and is unsecured and subordinated to the company’s bank debt.

 

  

NOTE 10 – PROFIT SHARING PLAN

 

The company maintains a contributory profit sharing plan covering substantially all fulltime employees within the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). The company is required to make a safe harbor non-elective contribution equal to 3 percent of a participant’s compensation. The plan also includes a 401(k) savings plan feature that allows substantially all employees to make voluntary contributions and provides for discretionary matching contributions determined annually by the Board of Directors. Company safe harbor contributions were $98,066 for 2014.

 

The BCS subsidiary also has a Safe Harbor plan within the requirements of ERISA that provides matching contributions equal to 100% of the employee deferred contribution up to 3% of the compensation, plus 50% of the deferred contributions that exceed 3% up to 5% of total participant compensation. The BCS matching contributions for the three months ending March 31, 2015 were $15,784.

 

NOTE 11 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following:

 

		March 31, 2015				December 31, 2014
Salaries and benefits		$	817,766			$	917,079
Unearned deferred revenue, net			827,228				288,342
Other liabilities			763,889				557,360
Total accrued expenses and other current liabilities		$	2,296,366			$	1,762,781

 

The Company has adopted a policy related to the monthly reoccurring revenue on the sale of service contracts. This amounted to approximately $827,228 of additional gross margin sold in the 1^st quarter of 2015 which will be amortized over the respective life of the service contracts. These agreements generally have a life of 1-5 years and are being recognized over the actual term of the contract. 

 

Other liabilities are made up of $281,755 of sales tax payable, $105,546 of profit sharing and flexible spending liability from prior year, as well as $218,650 of sales commission payable and $157,937 of other liabilities.

 

NOTE 12 – TERM DEBT / WELLS FARGO LINE OF CREDIT DETAILS

 

On December 31, 2014 the company entered into a 3 year, $8 million revolving line of credit agreement with Wells Fargo Bank (“WFB”) which provides for borrowings based on eligible trade accounts receivable, as defined in the WFB loan agreement dated December 31, 2014. The line is secured by trade accounts receivable and a first priority lien on substantially all of the assets of the company. All other debt of the company is subordinated to the bank line of credit. The line of credit allows the Company to cause the issuance of up to $500,000 of letters of credit on account of the Company, as defined in the loan agreement. No letters of credit were outstanding as of December 31, 2014.

 

As of March 31, 2015, the outstanding balance on the line of credit was approximately $2,504,213 and the interest rate was computed based on the daily 3 month LIBOR rate plus the applicable margin as defined in the credit agreement or 3.52075%. The line of credit has certain financial and other non-financial covenants that are measured and reported monthly to the bank. The Company is currently working with the bank to adjust the financial and non-financial covenants which will allow for more borrowing capacity on the line of credit and flexibility for operations.

 

In connection with the new credit facility the company also entered into a 3 year purchasing card agreement with the bank that provides for quarterly cash rebates to the company based on the volume of purchases during the quarter. At March 31, 2015 there was $ 693,788 on the card agreement with the bank. Additionally, the purchasing card agreement provides the company with a signing bonus paid in February 2015. The signing bonus will be recorded as deferred revenue and amortized into income from operations over the 36 month life of the purchasing card agreement. The signing bonus received contains certain performance thresholds, that if not met would require the company to return a pro rata portion of the purchasing card signing bonus to the bank at the end of the 3 year term. Based on current business projections the company believes the entire amount will be earned during the term of the agreement. In connection with the credit facility the company was responsible for the bank’s legal and audit costs and a $40,000 loan origination fee paid at closing. Total fees paid or accrued were $90,000, which have been capitalized at December 31, 2014 and will be amortized into expense over the 3 year term of the credit facility.

 

  

NOTE 13 – NOTES PAYABLE

 

Notes and loans payable consisted of the following: 

 

		March 31, 2015				December 31, 2014
Note payable - acquisition of Quest / BCS		$	23,808,825			$	24,408,825
Accrued interest			165,800				—
Total notes payable			23,974,625				24,408,825
Less: debt discount			(3,000,000	)			(3,200,000
Less: current portion			(3,601,650	)			(4,201,650	)
Total long-term notes payable		$	17,372,975			$	17,077,175

 

As of March 31, 2015 and December 31, 2014, the Company recorded interest expense in connection with these notes in the amount of $81,337 and $51,806, respectively.

 

NOTE 14 – STOCKHOLDERS’ EQUITY

 

PREFERRED STOCK

 

As of March 31, 2015, there were 25,000,000 preferred shares authorized and 500,000 preferred shares outstanding. The board of directors had previously set the voting rights for the preferred stock at 1 share of preferred to 250 common shares.

 

COMMON STOCK

 

There were no shares of stock issued during the first quarter of 2015.

 

Warrants and Options

 

On February 26, 2015, the Company issued two board of directors a total of 72,000 warrants valued at $19,758 for their service.  The value of these warrants was estimated by using the Black-Scholes option pricing model with the following assumptions: exercise price of $0.43, term of 3 years; risk free interest rate of 1.04%; dividend yield of 0% and expected volatility of 104%.

 

NOTE 15 – LITIGATION

 

As of March 31, 2015, the Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the Company’s Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

 

  

NOTE 16 – RELATED PARTY TRANSACTIONS

 

The company leases a building from the former owner of BCS for $9,000 per month, which is believed to be the current fair market value of similar buildings in the area. These amounts are included in the lease disclosure schedule, footnote 8.

 

In connection with the BCS acquisition the company has an earn out/royalty receivable from the new owners of the BCS RFID business that was sold on November 19, 2014, prior to the acquisition by the Company. The maximum amount to be paid during the 4 year earn out period ending December 31, 2018 is $700,000. Payments to the company are due within 30 days of the closing of each calendar quarter and the first royalty calculation and payment is due to the company on April 30, 2015. Prior to the merger with Quest, BCS recorded a 50% valuation reserve to the fair market value of this earn out receivable as of the acquisition date by Quest Solution.

 

As of March 31, 2015, the Company owes $67,000 to an entity controlled by the CFO for services provided to BCS prior to its acquisition in November 2014.

 

Additional related party transactions discussed in Notes 13 (Notes Payable) and 14 (Stockholder’s Equity).

 

NOTE 17 – SUBSEQUENT EVENTS

 

On May 1, 2015, the Board of Directors, appointed Robert F. Shepard to the Board to fill a vacancy on the Board.

 

In connection with his appointment to the Board, Mr. Shepard will receive (i) $3,000 per quarter as Board compensation and (ii) stock options for 36,000 shares of common stock, par value $0.001 per share (the “Common Stock”) granted at the Company’s current stock price, which vest over a three-year term.

 

On May 1, 2015, Jason F. Griffith resigned as the Chief Executive Officer of the Company and Chairman of the Board, effective immediately.

 

Simultaneous with Mr. Griffith’s resignation, the Company and Mr. Griffith entered into that certain First Amendment to Employment Agreement (the “Griffith Employment Agreement Amendment”) to Mr. Griffith’s Employment Agreement, dated November 20, 2014 (the “Griffith Employment Agreement”). Pursuant to the terms of the Griffith Employment Agreement Amendment, Mr. Griffith was appointed as the Company’s Executive Vice President of Strategy and Acquisitions.

 

Additionally, the Griffith Employment Agreement called for the Company to acquire a key man life insurance policy before December 31, 2014; the Griffith Employment Agreement Amendment eliminated this clause. Concurrently, Mr. Griffith retains a right of first refusal to assume the policy should the Company cease to maintain such policy. Should Mr. Griffith resign from his position with the Company, he has the right to assume the policy at the then fair market value.

 

On May 1, 2015, Scot Ross, a current member of the Board and Chief Financial Officer of the Company, resigned as a member of the Board, effective immediately. Mr. Ross will continue in his role as Chief Financial Officer of the Company.

 

Simultaneous with Mr. Ross’ resignation from the Board, the Company and Mr. Ross entered into that certain First Amendment to Employment Agreement (the “Ross Employment Agreement Amendment”) to Mr. Ross’ Employment Agreement, dated November 20, 2014 (the “Ross Employment Agreement”). The Ross Employment Agreement called for the Company to acquire a key man life insurance policy before December 31, 2014; the Ross Employment Agreement Amendment eliminated this clause. Concurrently, Mr. Ross retains a right of first refusal to assume the policy should the Company cease to maintain such policy. Should Mr. Ross resign from his position with the Company, he has the right to assume the policy at the then fair market value.

 

  

On May 1, 2015, Thomas Miller, current member of the Board, became the Chairman of the Board and was appointed as Chief Executive Officer of the Company.

 

Simultaneous with Mr. Miller’s appointment as Chief Executive Officer of the Company, the Company and Mr. Miller entered into an Employment Agreement, dated May 1, 2015 (the “Miller Employment Agreement”). The Miller Employment Agreement has an initial term of two (2) years (the “Term”). Mr. Miller’s employment with the Company shall continue until the earlier of (i) the end of the Term, or (ii) until Mr. Miller’s cessation of employment with the Company for any reason or without reason (the “Employment Period”). Mr. Miller’s initial base salary shall be $200,000 per year. Mr. Miller shall receive (i) a one-time sign-on bonus of 100,000 shares of restricted Common Stock and (ii) a performance bonus based on the Company’s operational and financial performance.

 

During the Employment Period, Mr. Miller’s employment with the Company shall be at-will and may be terminated by either the Company or Executive at any time, and for any reason. In the event the Company terminates Mr. Miller’s employment with the Company prior to the expiration of the Employment Period for any reason or in the event Mr. Miller resigns from the Company voluntarily, then the Company shall pay to Mr. Miller the Separation Benefits (as that term is defined in the Miller Employment Agreement. In the event Mr. Miller voluntarily resigns for Good Reason (as defined in the Miller Employment Agreement) or the Company terminates Mr. Miller’s employment for any reason other than for Cause (as defined in the Miller Employment Agreement), then the Company shall pay to Mr. Miller the Termination Benefits (as defined in the Miller Employment Agreement).

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the Securities and Exchange Commission this Form 10-Q, including exhibits, under the Securities Act. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at SEC’s Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.

 

You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov.

 

We intend to furnish our stockholders with annual reports which will be filed electronically with the SEC containing consolidated financial statements audited by our independent auditors, and to make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial statements.

 

Quest’s website is located at http://www.QuestSolution.com. The Company’s website and the information to be contained on that site, or connected to that site, is not part of or incorporated by reference into this filing.

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This discussion contains forward-looking statements. The reader should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward- looking statements contained herein will be realized. Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the Company’s results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.

 

A complete discussion of these risks and uncertainties are contained in our Annual Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission on April 9, 2015.

 

Introduction

 

Quest Solution, Inc., a Delaware corporation (“QUES” or the “Company”), formerly named Amerigo Energy, Inc. was incorporated in 1973. Prior to 2008, the Company was involved in various unrelated business activities. From 2008-2014 the company was involved in multiple businesses inclusive of an oil and gas investment company. Due to changes in market conditions, management determined to look for acquisitions which were positive cash flow and would provide immediate shareholder value. In January 2014, we made our first such acquisition of Quest Marketing Inc. (dba Quest Solution, Inc.).

 

Quest Solution is a national mobility systems integrator with a focus on design, delivery, deployment and support of fully integrated mobile solutions. The Company takes a consultative approach by offering end to end solutions that include hardware, software, communications and full lifecycle management services. The professionals simplify the integration process and deliver the solutions to our customers. Motorola, Intermec, Honeywell, Panasonic, AirWatch, Wavelink, SOTI and Zebra are major suppliers which Quest Solution uses in the solutions we provide to our customers.

 

  

In May 2014, our Board of Directors voted to get approval from the shareholders of the Company for a name change from Amerigo Energy, Inc. to Quest Solution, Inc. The company received the approval from a majority of its stockholders and filed the amendment to its Articles of Incorporation with the State of Delaware. The name change became effective by the State of Delaware on May 30, 2014. The Company also requested a new stock symbol as a result of the name change and we assigned our new trading symbol “QUES”.

 

The Quest Solution business plan previously included developing oil and gas reserves while increasing the production rate base and cash flow. Due to declines in production on the oil leases the company had an interest in, the company was forced to revisit its position in the oil industry.

 

The Company’s business strategy developed into leveraging management’s relationships in the business world for investments for the Company. The company intends on continuing with its acquisition of existing companies with revenues and positive cash flow.

 

In November 2014, the company acquired 100% of the shares of Bar Code Specialties, Inc. (“BCS”) located in Southern California. BCS is a national mobility systems integrator and label manufacturer with a focus on warehouse and distribution industries. Since the combination of the two companies, the company has been exploring efficiencies in all facets of the businesses and learning best practices from both executive teams

 

The following is a discussion of the Company’s financial condition, results of operations, financial resources and working capital. This discussion and analysis should be read in conjunction with the Company’s financial statements contained in this Form 10-Q.

 

Overview

 

RESULTS OF OPERATIONS

 

Revenues

 

For the three months ended March 31, 2015 and 2014, the company generated net revenues in the amount of $10,675,970 and $9,622,160, respectively, the increase is attributable to the acquisition of BCS in November 2014.

 

The Company has adopted a policy related to the monthly reoccurring revenue on the sale of service contracts. This amounted to approximately $827,228 of additional gross margin sold in the 1^st quarter of 2015 which will be amortized over the respective life of the service contracts. These agreements generally have a life of 1-5 years and are being recognized over the actual term of the contract.

 

Cost of Goods Sold

 

For the three months ended March 31, 2015 and 2014, the company recognized a total of $8,281,365 and $7,634,584. The increase is attributable to the increased sales and the BCS acquisition in November 2014.

 

For the 3 months ended March 31, 2014, the Company recorded $347,261 of cost of goods sold, related party expense, as opposed to $0 recorded during the 3 months ended March 31, 2015. There was no related party cost of goods sold in 2015 as the company did not renew those agreements.

 

Operating expenses

 

Total operating expense for the three months ended March 31, 2015 and 2014 recognized was $2,489,476 and $1,789,039, respectively the increase is attributable to the BCS acquisition.

 

General and administrative expenses for the three months ended March 31, 2015 and 2014 totaled $1,012,444 and $245,155 during the comparable three month period. The increase is primarily the result of an increase in business activities related to the BCS acquisition as well as the reallocation of resources.

 

Salary and employee benefits for the three months ended March 31, 2015 totaled $1,324,432 as compared to $1,381,716 for the three months ended March 31, 2014. The decrease is related to the reallocation of resources since the BCS acquisition.

 

Stock compensation for the three months ended March 31, 2015 were $38,624 as compared to $24,499 for the three months ended March 31, 2014. The increase was related to the company issuing stock for services during the period.

 

Professional fees for the three months ended March 31, 2015 were $88,480 as compared to $129,775 for the three months ended March 31, 2014. The decrease was related to the decrease of professional accounting, consulting and legal services that were used by firms outside the company.

 

  

Other income and expenses

 

Interest Expense - Interest expense for the three months ended March 31, 2015 totaled $ 395,272, including $200,000 of OID discount on the Quest subordinated debt, as compared to $600 for the three months ended March 31, 2014. The increase is directly related to accrued interest associated with the BCS acquisition and the OID discount charge relating to the outstanding balances on the Quest Acquisition subordinated debt.

 

Net income (loss) attributable to common stock

 

The company realized a net loss of $422,082 for the three months ended March 31, 2015, compared to a net income of $246,419 for the three months ended March 31, 2014, a decrease of $668,500. The decrease in net income is attributable to $395,272 of interest expense ($200,000 of which was debt discount on the accretion of promissory note), as well as the additional costs incurred related to the acquisition in November 2014.

 

Liquidity and capital resources

 

At March 31, 2015, we had cash in the amount of $277,432 and a working capital deficit of $5,116,208. In addition, our stockholders’ equity was $791,188 at March 31, 2015 and $1,193,512 at December 31, 2014.

 

Our accumulated deficit increased from $16,742,156 at December 31, 2014 to $17,164,238 at March 31, 2015.

 

Our operations resulted in net cash provided of $131,560 during the three months ended March 31, 2015, compared to cash used of $657,536 during the three months ended March 31, 2014, an increase of $789,096. This is predominantly attributable to the net cash provided by deferred revenue of $827,228 and our increased collection of receivables due to the larger company with the acquisition of BCS in November 2014.

 

Net cash provided by investing activities was $13,543 for the three months ended March 31, 2015, compared to net cash provided of $1,962,619 for the three months ended March 31, 2014, a decrease of $1,949,076. The large decrease was attributable to in March 2014 we acquired Quest Marketing, Inc. and in the first quarter 2015 we did not have an acquisition.

 

Our financing activities used net cash of $101,412 during the three months ended March 31, 2015, compared to net cash used of $752,500 during the three months ended March 31, 2014, a decrease of $651,088. The decrease is attributable to the proceeds from our line of credit of $694,595.

 

Inflation

 

The Company’s results of operations have not been affected by inflation and management does not expect inflation to have a material impact on its operations in the future.

 

Off- Balance Sheet Arrangements

 

The Company currently does not have any off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not Applicable

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS

 

We evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015, the end of the period covered by this Quarterly Report on Form 10-Q. This evaluation was undertaken by our Chief Executive Officer Thomas Miller.

 

Mr. Miller serves as our principal executive officer. The Company utilizes a third party to assist in the financial statement preparation for the auditor and our wholly owned subsidiary has an accounting team to prepare the financials at that level.

 

We reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the fiscal quarter covered by this report, as required by Securities Exchange Act Rule 13a-15, and concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management on a timely basis, including our principal executive officer and principal financial and accounting officer.

 

CONCLUSIONS

 

Based on this evaluation, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file pursuant to the Exchange Act are recorded, processed, summarized, and reported in such reports within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

CHANGES IN INTERNAL CONTROLS

 

There were no changes in our internal controls over financial reporting that occurred during the last fiscal quarter, i.e., the three months ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

(a)		Exhibits.
31.1		Certification of our Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of our Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 15, 2015

 

By:	/s/ Thomas Miller
	Thomas Miller
	Chief Executive Officer